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NTL Eyes Mobile Buy

U.K. cable provider ntl group ltd. (Nasdaq: NTLI) is running alongside the fixed/mobile convergence bandwagon, today confirming media speculation over the weekend that it's put in a bid for Virgin Mobile Telecoms Ltd., the nation's fifth largest operator. (See NTL Approaches Virgin Mobile.)

NTL, in the midst of a merger with rival cable operator Telewest Communications Networks plc (Nasdaq: TWSTY), is offering 323 pence -- or 0.09298 NTL shares -- per Virgin Mobile share, valuing the deal at £817 million (US$1.41 billion). That price is a 3.9 percent premium on Virgin's closing price on Friday. Virgin also released a brief statement confirming the approach, saying only that it "may or may not" lead to a formal offer.

But Virgin's owner, the round-the-world-balloon-flying Sir Richard Branson, has said he's prepared to exchange his 72 percent stake in the mobile company for a 14 percent stake in NTL, making him its largest shareholder.

Virgin's share price rose throughout the day, closing up more than 10 percent, or 31.5 pence, to 342.5 pence on the London Stock Exchange, a sign investors could be after a higher bid from NTL or a counterbid. As Virgin noted in its statement: "In considering its response, the Board of Virgin Mobile will be mindful of its duty to maximise value for all shareholders."

A merger to incorporate the two cable companies and the mobile operator would create an entity -- rebranded as Virgin -- with 3.3 million TV customers, 2.5 million broadband subscribers, 4.3 million fixed-line users, and 5 million mobile users. As a virtual network operator, Virgin uses T-Mobile (UK)'s network to carry calls, and NTL says it's already held discussions with T-Mobile and got the go-ahead.

After a long wait, the European telecom market is consolidating fast, and NTL would be the latest in a string of fixed-line operators converging with mobile players. (See TI Plans Converged Services, Telefónica Swoops In on O2, Deutsche Telekom Spews News, and FT Takes on Telefónica.) NTL indicated during its recent quarterly earnings report that it was looking into offering quadruple-play services (voice/video/data triple play plus mobile). "We absolutely believe that having a mobility offering would enhance our business, and would have all sorts of beneficial effects," CEO Simon Duffy said on a conference call at the time. (See NTL Losses Drop in Q3.)

But such a deal is not without its pitfalls. Ovum Ltd. analyst Julian Hewitt writes in a note that while the Virgin brand (which spans 150 businesses from soft drinks to an airline via a record company) has a better reputation among consumers than either NTL or Telewest, "Virgin Mobile mostly has low-spending pre-pay customer[s], which are not well suited to conversion to a quad-play contract."

Hewitt points out the perils of NTL's management attempting to balance two mergers at once while working on improving its TV offering and rolling out higher broadband speeds: "Remember what happened to AOL + Time Warner."

And then there's the whole quadruple-play, fixed/mobile convergence thing itself: "Offering cut-price deals to encourage customers to take a quad service is one thing. A much bigger challenge will be to generate value from actual convergence between the services." He adds that mobile TV is an unproven proposition, and Virgin has only made it as far as a 1,000-person DAB trial in London.

The deal aims to spell trouble for rivals (NYSE: BT; London: BTA), which is talking about providing TV over DSL next year, and satellite operator BSkyB Group plc, which recently bought its way into triple-play with the acquisition of Easynet Ltd.. (See Murdoch's Sky Takes on BT.) Both were down on the London Stock Exchange following the news; Sky shares had dropped 13.5 pence (2.67%) to 491.5 pence when the market closed, and BT was down 1.75 pence (0.82%) to 212.5 pence.

Analysts at Panmure Gordon downgraded BSkyB on the news. "Combined group would have 10 million subscribers versus BSkyB's 8 million, and is rumored to be bidding for footballing rights," according to a note. "BSkyB have a number of hurdles to overcome in the near future, with increased competition in the sector we downgrade to sell."

As Hewitt notes, "If this deal goes through, it will define the shape of the UK consumer telecoms/entertainment landscape for the next decade: BSkyB versus Virgin versus BT, with the global Internet portals (Google, Yahoo! et al) as wild cards."

— Nicole Willing, Reporter, Light Reading

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